The foreign exchange market, or forex as it is colloquially termed, offers at least a dozen of tradable opportunities every day. Anyone with the market knowledge and skill set to capitalize on these opportunities can find themselves earning significant wads of cash with minimal amount of work. Of course, before you go rushing into the forex market, it’s paramount that you know its distinguishing characteristics from other financial markets like stocks and bonds.
Spot forex trading does not require the presence of middlemen, which ultimately means more savings passed on to the consumer end. You can trade directly with the exchanges responsible for “making the market”, so to speak. Being able to trade directly with market makers allows you to reduce execution time substantially, enabling you to enter or exit positions at better prices.
Large and Liquid Market
In fact, foreign exchange is the largest amongst all financial markets in the world. Daily exchange of currencies go beyond $4 trillion per day, a huge chunk of which is transacted via spot trading. Being a liquid market, you can enter and exit positions in as little time as possible. Hours of high liquidity occur during times of the day when two different exchanges overlap. The four main exchanges in FX include US, London, Japan, and Sydney.
Other financial assets do not provide such freedom. You cannot trade stocks during midnight or bonds during early morning hours before going to work. As a result, traders are limited of their opportunities. With forex, you can trade any time of the day, starting from Sunday 5PM Eastern Time to Friday 5PM Eastern Time. On the same note, this should not be taken as an invitation to trade nonstop. Trading too frequently can be detrimental to a trader, especially if they are yet to hone their trading abilities.
Majority of stock brokers charge as much as $10 per trip, which means you pay as much as $20 per roundtrip position. This can dent your initial balance and lead to higher losses over time. Forex trading brokers offer much tighter spreads, which pertain to the difference between the Bid and Ask prices. Of course, the actual amount you pay in commission will depend primarily on current volatility and position size. It’s ill advised to trade during highly volatile times, such as 5PM Eastern Time when Japan is about to open, as spreads tend to jump to ridiculous numbers.
Long and Short Opportunity
Forex trading as well as other financial markets like stock and commodity now allow you to short an asset. Shorting an asset means you are betting that it will drop in value. Shorting is a useful tool for bearish market cycles and weak economic climates wherein investor sentiment is leaning towards a risk-averse stance.
Ability to Bounce Back
Stock prices can drop to as low as zero, but since trading foreign exchange involves two economies pitted against each other to make a pair, it’s impossible for either one of the currencies to end up at zero. Despite cases wherein a currency drops or rises in value by a significant amount, oftentimes it corrects itself. As a trader, however, avoid holding onto a losing position. Cut down losing positions quickly before they turn into regretful and financially debilitating losses.